Seaforth International wrote off the following accounts receivable as uncollectible for the year ending

Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31, 2014:


Customer Amount
Kim Abel $ 21,550
Lee Drake 33,925
Jenny Green 27,565
 Mike Lamb 19,460
Total $102,500
The company prepared the following aging schedule for its accounts receivable on
December 31, 2014:
Aging Class (Number
of Days Past Due)
Receivables Balance
on December 31
Estimated Percent of
Uncollectible Accounts
0–30 days $ 715,000 1%
31–60 days 310,000 2
61–90 days 102,000 15
91–120 days 76,000 30
More than 120 days 97,000 60
Total receivables $1,300,000




a. Journalize the write-offs for 2014 under the direct write-off method.
b. Journalize the write-offs and the year-end adjusting entry for 2014 under the allowance method, assuming that the allowance account had a beginning balance
of $95,000 on January 1, 2014, and the company uses the analysis of receivables method.
c. How much higher (lower) would Seaforth International’s 2014 net income have been under the allowance method than under the direct write-off method?


Answer:

a.
 Bad Debt Expense 102,500
Accounts Receivable—Kim Abel 21,550
Accounts Receivable—Lee Drake 33,925
Accounts Receivable—Jenny Green 27,565
Accounts Receivable—Mike Lamb 19,460
b.
 Allowance for Doubtful Accounts 102,500
Accounts Receivable—Kim Abel 21,550
Accounts Receivable—Lee Drake 33,925
Accounts Receivable—Jenny Green 27,565
Accounts Receivable—Mike Lamb 19,460
Bad Debt Expense 117,150
Allowance for Doubtful Accounts 117,150
Uncollectible accounts 

Computations:
Aging Class
(Number of Days
Past Due)
Receivables
Balance on
December 31
Estimated Doubtful
Accounts
Percent Amount
0–30 days $ 715,000 1% $ 7,150
31–60 days 310,000 2% 6,200
61–90 days 102,000 15% 15,300
91–120 days 76,000 30% 22,800
More than 120 days 97,000 60% 58,200
Total receivables $1,300,000 $109,650
Unadjusted debit balance of Allowance for Doubtful Accounts
($102,500 – $95,000)……………………………………………………………………… $ 7,500
Estimated balance of Allowance for Doubtful Accounts
from aging schedule…………………………………………………………………… 109,650
Adjustment………………………………………………………………………………… $117,150




c. Net income would have been $14,650 lower in 2014 under the allowance method, because bad debt expense would have been $14,650 higher under the allowance method ($117,150 expense under the allowance method versus $102,500 expense under the direct write-off method).